ALEX BRUMMER: Keeping the LSE independent is not just about sentiment. It is an essential part of the UK's financial infrastructure

Enthusiasm for the great all singing and dancing merger of the London Stock Exchange by Frankfurt’s Deutsche Boerse looks to be rapidly vanishing.

Aside from the fact it is an ill-thought alliance, the political and regulatory barriers look like Everest.

Politically, if such a deal were to get the nod from investors, it would be a difficulty for the ‘Remain’ campaign and a plus for Brexit.

Boris Johnson, Nigel Lawson et al would be able to claim Brexit makes no difference to financial prospects because Germany, Europe’s anchor economy, remains interested in making vital deals with the City whether we are in or out.

Deal breakers: Political and regulatory barriers look set to scupper the proposed merger of London Stock Exchange by Frankfurt's Deutsche Boerse

As broker BNP Paribas points out, the LSE deal is fraught with regulatory risk. It would require scrutiny from the European Commission and, given past form, it would get the same cool treatment. In 2012 it blocked a proposed deal between Deutsche Boerse and the New York Stock Exchange. Indeed, its attitude might be even colder this time since it would eliminate competition in clearing and cross-border trading.

That is not all. The Treasury Select Committee would be remiss if it didn’t at least look at the deal from a regulatory view. The idea that the free-wheeling LSE with its open access trading and clearing platforms could find itself under the stifling regulation of Brussels or Frankfurt does not make a lot of sense.

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One of the most troubling aspects of EU membership for George Osborne has been the continuing efforts of Brussels bureaucrats to undermine the flexibility of the City which has made it so attractive internationally.

New data, to be released shortly, shows that London is the runaway winner in the battle to be the world’s most important financial centre, and outstrips New York with its quantum of highly skilled workers.

There will be efforts to blind us with financial detail about the deal, with brokers arguing the £20billion merger (read takeover) could deliver £240million in costs savings.

That all sounds fine and dandy except that execution will be the key. As Frankfurt would hold the majority of the shares (54 per cent), the axe would fall more fiercely in London.

Long before any detail is settled, Deutsche Boerse chief executive Carsten Kengeter is assuring his local audience that trading would not be pulled out of Frankfurt. The implication is that the LSE would have to take the hit.

A power struggle also is brewing over who would lead a merged exchange. LSE chief executive Xavier Rolet, who through a series of imaginative deals has kept London ahead of the pack, rightly thinks he has earned the right to be in charge.

Kengeter thinks differently. If, as suggested, the holding company is based and quoted in London, then Frankfurt will hold out for the top job.

Armed with this and the bigger shareholding it will effectively be able to do what it wants.

Keeping the LSE independent is not just about sentiment. It is an essential part of the UK’s financial infrastructure including the Turquoise pan-European equity trading platform built in co-operation with the big global investment banks.

The 3.73 per cent drop in LSE shares in latest trading suggests that reality is dawning about the obstacles to this deal. It may well be that other big beast exchanges, including Atlanta-based ICE (owner of the New York Stock Exchange), Chicago’s CME or the Hong Kong Exchange, might fancy their chances better.

The preferred route must be for the LSE to follow up its success with the takeover of Russell Investments in 2014 with another transformational deal that keeps would be predators at bay.

An obvious target might be Michael Spencer’s inter-dealer brokerage Icap now that the shadow of interest rate fixing has lifted.

That would make a great deal more sense than a troublesome marriage with Frankfurt.

Iron will

Finance ministers are going to have a tough time finding the right language to calm markets at the Shanghai meeting of G20 finance ministers this weekend.

Setting the scene, Germany’s hardline finance minister Wolfgang Schaeuble warns against printing more money and piling up debt, saying it leads to ‘misfortune.’ He criticised the Federal Reserve for sending out ‘conflicting signals’ on interest rates in a message that could also be applied to the Bank of England.

As for Brexit, Schaeuble notes it is not off the table yet and the European Union may not be in the best shape to absorb it.

We live in interesting times.

Less stress

Health tests by the London-based European Banking Authority have long been regarded with suspicion.

It largely failed to spot that much of the Italian banking system is bust or the problems of Portugal’s Novo Banco, created out of the ashes of Espirito Santo.

In future, safety of the banks will be measured by their ability to raise funds in the bond markets. That will save the blushes of some of the 51 banks it scrutinises which will no longer receive a simple pass or fail mark.